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Air Canada’s arbitration winning streak continues with Chorus ruling

Air Canada has come out on top in a dispute over cost markups with regional partner Chorus Aviation, with one analyst saying an arbitration panel’s decision on the issue could take a bite out of Chorus’ dividend.

Wed., Oct. 3, 2012

MONTREAL—Air Canada has come out on top in a dispute over cost markups with regional partner Chorus Aviation, with one analyst saying an arbitration panel’s decision on the issue could take a bite out of Chorus’ dividend.

Under the decision, the panel accepted Air Canada’s methodology involving benchmarking provisions in Chorus’ capacity purchase agreement with Air Canada.

The provisions compare the rate of growth of controllable costs at Chorus’ operating subsidiary, Jazz Aviation, to those of a specified group of similar operators.

Although a majority on the arbitration panel ruled that the current 12.5 per cent markup is too high, it didn’t agree to lower it to the level Air Canada was seeking.

Chorus said it will seek clarification on the panel’s decision.

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Cameron Doerksen of National Bank Financial said the ruling could force Chorus to cut its dividend by 25 to 35 per cent even though the decision isn’t the worst of possible outcomes.

The award is retroactive to 2010 and will require Chorus to repay millions of dollars in markups to Air Canada.

The amount owed wasn’t clear but under the worse-case scenario, Chorus estimated that it would be required to repay $24.4 million for 2010 and $24.7 million for 2011. Doerksen had estimated the amount in 2013 would range between $15 million and $20 million.

Chorus had $97.1 million in cash at the end of the second quarter but lower free cash flow stemming from a lower markup and capital requirements for new aircraft purchases could force the substantial dividend cut, Doerksen added.

Earlier, Air Canada won separate arbitration rulings with its pilots, flight attendants and machinists to end months of labour disputes.

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